Econ Exam 3

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Chapter 7

Question Answer
consumption expenditurespurchases of newly produced goods and services by households (denoted by C )
gross domestic productthe total market value of all final goods and services produced within a society over a certain period of time
intermediate gooda good used in the production process that is not a final good or service consumption expenditures
private investment expenditurespurchases of newly produced goods and services by firms (e.g., spending on new plants and equipment) (denoted by I )
government purchasespurchases of newly produced goods and services by local, state, or federal government (denoted by G )
importa good or service produced in a foreign country and purchased by someone in the home country
exporta good or service produced in the home country and sold in a foreign country
net exportexports minus imports (denoted by NX)
trade deficitthe excess of imports over exports
trade surplusthe excess of exports overimports

Chapter 7-1

Question Answer
Real GDPY = C + I + G + NX
real GDPthe value of GDP computed using prices from an arbitrary base year (i.e., a measure of GDP that controls for changes in prices, since across different periods goods/services are valued at common, constant prices)
nominal GDPthe value of GDP computed using current period prices
real GDP per capitavalue of real GDP divided by total population of the country
Industrially Advanced Countries (IAC’s)high income countries with primarily market based economies, large stocks of technologically advanced industrial capital, and a highly educated and skilled workforce (e.g., U.S., Norway, Australia, Germany, Japan)
Less Developed Countries (LDC’s)lower income countries which are held back by some combination of poor economic institutions, undeveloped industrial capital, and/or an uneducated and unskilled workforce (e.g., India, Ghana, Bangladesh, and the Democratic Republic of theCongo)
economic developmentimprovements over time in a society’s quality of life and living standards  by definition, very qualitative in nature  includes, but not limited to, increased consumption of material goods/services
economic growthsustained increases over time in a society’s value of Real GDP  graphically illustrated by an outward shift of the PPF  measured quantitatively as the percentage increase in Real GDP
GDP growth rateannual percentage change in the value of real GDP
catch-up effectconjecture that (all other factors fixed) the growth rates of less developed countries will exceed the growth rates of developed countries, allowing the less developed countries to “catch up” over time

Chapter 7-2

Question Answer
Rule of 72the observations that a variable that grows at a constant rate of “X% per period” will double in value in approximately “(72/X) periods”
physical capitalmachines, building, factories, and other equipment used in the production process
human capitalthe knowledge, education, skills, experience, work ethic, interpersonal skills, and other attributes of workers which determine productivity
technologythe application of scientific and engineering principles to the problem of production
Four broad sources of economic growth (i.e., changes that would lead to an “outward movement of PPC over time”)1. Increases in the quantity of labor (i.e., more workers) 2. Increases in the quantity of physical capital (e.g., more factories, trucks, computers, electricity plants) 3. Improvements in quality of labor (e.g., workers are more highly educated/skilled) 4. Improvements in technology
three common ways to achieve economic growth1. Deliberate investments in human capital and physical capital (either by individuals or society) => when a society devotes more resources to producing capital goods today, they will have more capital goods available in the future (but, at the expense of having fewer consumer goods in the present period) 2. Deliberate investments by society in overhead capital (overhead capital – basic infrastructure such as railways, roads, telecommunications networks, electricity supply systems, water supply systems) 3. Realize improvements in technology which fundamentally alter the type of capital available or the production process => most economic growth in recent decades and centuries has come from improvements in technology
three impediments to achieving growthI. difficulties in developing physical capital • Vicious-cycle-of-poverty hypothesis – conjecture that poor countries willremain poor since they do not have sufficient resources available to make the investments in capital which are necessary for economic growth • Capital flight – tendency for wealthy people in poor countries to invest their financial capital abroad instead of at home II. difficulties in developing human resources • poor health outcomes degrade human resources  2015: 438,000 malaria deaths (90% in Africa)  2014: 1.2 million AIDS-related deaths (65% in Africa)• brain drain – tendency for the most highly talented people from developingcountries to become educated and then move to an already wealthy countryIII. poor legal, political, and economic institutions• Rule-of-Law – environment in which property rights and contracts arerespected and administered fairly and transparently, without favoritism countries lacking rule-of-law have difficulty achieving growth• Crony Capitalism – environment in which well-connected unscrupulousbusiness people use corrupt political systems to their advantage in order toobtain preferential treatment from government (e.g., government contracts,subsidies, bailouts, tax loopholes) in such an environment, the efficient use of resources is distorted to thedetriment of economic growth• Government ownership/control of productive resources (i.e., a reliance onplanning instead of markets, socialism instead of capitalism) government ownership of resources removes profit motive => reducedincentive to create value and innovate to reduce costs (dampeningeconomic growth)

Chapter 9

Question Answer
inflation ratethe rate at which the overall price level increases on an annual basis
deflationa general decrease in the level of overall prices (i.e., a realization of a negative inflation rate)
hyperinflationan extremely high rate of inflation, generally above 100% per year
unemployment ratethe percentage of the labor force that is currently unemployed  Misery Index – economic indicator created by Arthur Okin, calculated by simply adding together the annual inflation rate and the unemployment rate  “The Great Inflation” – period of abnormally high inflation rates from early 1970’s through early 1980’s  Over 6% in 99 of 108 months (91.7% of months) from 8/1973 to 7/1982  Over 6% in only 11 of 660 other months (1.7% of months) from 1/1952 to 12/2015

2015 Inflation Rates

Question Answer
Hong Kong3.0%
United Kingdom0.1%

2015 Unemployment Rates

Question Answer
Hong Kong2.9%
United Kingdom5.4%
New Zealand5.8%